Sainsbury (J.) Plc v O'Connor
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE LLOYD,LORD JUSTICE NOURSE,LORD JUSTICE RALPH GIBSON |
| Judgment Date | 22 May 1991 |
| Judgment citation (vLex) | [1991] EWCA Civ J0522-3 |
| Docket Number | 91/0517 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 May 1991 |
[1991] EWCA Civ J0522-3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE LIST)
(MR JUSTICE MILLETT)
Royal Courts of Justice
Lord Justice Lloyd
Lord Justice Nourse
Lord Justice Ralph Gibson
91/0517
MR ANDREW PARK Q.C. and MR LAUNCELOT HENDERSON, instructed by the Solicitor of Inland Revenue, appeared for the Appellant (Respondent).
MR P.S. WHITEMAN Q.C. and MR BRIAN GREEN, instructed by Messrs Denton Hall Burgin & Warrens, appeared for the Respondent (Appellant).
The question in this case is whether the taxpayer, J. Sainsbury Plc, can claim group relief under section 258 of the Income & Corporation Taxes Act 1970 in respect of trading losses of its subsidiary Homebase Ltd during the period 12th January 1981 to 9th August 1985.
In October 1978 Sainsburys entered into negotiations with a Belgian company GB-INNO-BM for setting up a joint venture company in the United Kingdom. The purpose was to develop a chain of home-improvement stores, with or without associated garden centres. The initial intention was that the shares should be held in the proportion 70% Sainsburys 30% GB. But in August 1979 it was realised (it is perhaps surprising that it was not realised before) that Sainsburys would not be able to take advantage of the group relief provisions unless the new company were a 75% subsidiary. So the solution which the parties reached was as follows. By a principal agreement dated 4th October 1979, ("the Joint Venture agreement") Sainsburys agreed to subscribe 75% of the share capital in the joint company, and GB 25%. By a separate option agreement of the same date, Sainsburys granted GB an option to purchase 5% of the share capital, ("the call option"), and GB granted Sainsburys an option to require GB to purchase 5% of the share capital ("the put option"). These options were not to be exercised within five years of the incorporation of the new company. In the event neither option was exercised, and the option agreement was cancelled by Deed dated 9th August 1985. It is not suggested that the agreements were a sham.
Two questions arise. The first is whether Sainsburys were "the beneficial owner" of the whole of its 75% holding, for the purpose of section 258 of the 1970 Act, notwithstanding GB's option to purchase 5% of the share capital after five years. The second question is whether, if Sainsburys would otherwise have been entitled to claim the benefit of group relief, the option agreement was an "arrangement" within the meaning of paragraph 5(3) of Schedule 12 of the Finance Act 1973. If so, Sainsburys would lose the benefit of group relief, by virtue of section 28 of the 1973 Act. The Special Commissioner answered the first question in favour of the taxpayer, and the second question in favour of the Crown. On appeal, by way of case stated, Millett J. answered both questions in favour of the taxpayer.
I find myself in complete agreement with the judge, not only with his conclusion, but also (subject to one minor point) with his reasons; so much so, that I would be content simply to adopt his judgment as my own. But as there is always the possibility of this case going higher, I must spell out my own reasons for dismissing the appeal.
Statutory Framework
I start by setting out for convenience the statutory provisions relevant to both questions.
I start with the 1970 Act. Section 258 provides:
"(1) Relief for trading losses…may in accordance with the following provisions of this Chapter be surrendered by a company (called 'the surrendering company') which is a member of a group of companies and, on the making of a claim by another company (called 'the claimant company') which is a member of the same group, may be allowed to the claimant company by way of a relief from corporation tax called 'group relief.
(5) For the purpose of this section…
(a) two companies shall be deemed to be members of a group of companies if one is the 75 per cent. subsidiary of the other or both are 75 per cent. subsidiaries of a third company,
(b)…"
Section 532 provides:
"(1) For the purposes of the Tax Acts a body corporate shall be deemed to be—
(a)…
(b) A '75 per cent. subsidiary' of another body corporate if and so long as not less than 75 per cent. of its ordinary share capital is owned directly or indirectly by that other body corporate,
(c)…
(3) In this section references to ownership shall be construed as references to beneficial ownership".
Sections 28 and 29 of the 1973 Act are "anti avoidance" provisions. Section 28(2) provides;
"Notwithstanding that at any time a company (in this subsection referred to as 'the subsidiary company') is a 75 per cent. subsidiary…within the meaning of section 532 of the Taxes Act, of another company (in this subsection referred to as 'the parent company') it shall not be treated at that time as such a subsidiary for the purposes of the enactments relating to group relief unless, additionally, at that time—
(a) the parent company is beneficially entitled to not less than 75 per cent…of any profits available for distribution to equity holders of the subsidiary company; and
(b) the parent company would be beneficially entitled to not less than 75 per cent…of any assets of the subsidiary company available for distribution to its equity holders on a winding-up".
Thus the broad effect of section 28 is that it is not enough for group relief that the parent company is beneficial owner of 75% of the ordinary share capital of its subsidiary; it must also be beneficially entitled to 75% of the dividends, and 75% of the assets on winding up.
Section 28(5) gives effect to Part 1 of Schedule 12 of the Act.
Section 29 applies to an arrangement whereby a company may cease to be a member of one group, and becomes a member of another group. Where such an arrangement is in existence, the company is treated as not being a member of the first group.
Schedule 12 is simple in concept, but complicated in detail. I shall refer to the relevant companies as parent and subsidiary, and for the sake of clarity I shall omit all reference to assets on a winding-up. The provisions relevant to the entitlement to dividends are as follows:
"1(1) For the purposes of section 28 of this Act and this Schedule, an equity holder of a company is any person who—
(a) holds ordinary shares in the company…
2(1) Subject to the following provisions of this Part of this Schedule, for the purposes of section 28 of this Act, the percentage to which one company is beneficially entitled of any profits available for distribution to the equity holders of another company means the percentage to which the first company would be so entitled in the relevant accounting period on a distribution in money to those equity holders of—
(a) an amount of profits equal to the total profits of the other company which arise in that accounting period (whether or not any of those profits are in fact distributed), or
(b) if there are no profits of the other company in that accounting period, profits of £100,
and in the following provisions of this Part of this Schedule, that distribution is referred to as 'the profit distribution'.
4(1) This paragraph applies if any of the equity holders—
(a) to whom the profit distribution is made…
holds, as such an equity holder, any shares or securities which carry rights in respect of dividend or interest…which are wholly or partly limited by reference to a specified amount or amounts (whether the limitation takes the form of the capital by reference to which a distribution is calculated or operates by reference to an amount of profits or assets or otherwise).
(2) Where this paragraph applies, there shall be determined—
(a) the percentage of profits to which, on the profit distribution, the first company referred to in paragraph 2(1) above would be entitled…
if, to the extent that they are limited as mentioned in sub-paragraph (1) above, the rights of every equity holder falling within that sub-paragraph (including the first company concerned if it is such an equity holder) had been waived.
(3) If, on the profit distribution, the percentage of profits determined as mentioned in sub-paragraph (2)(a) above is less than the percentage of profits determined under paragraph 2(1) above without regard to that sub-paragraph, the lesser percentage shall be taken for the purposes of section 28 of this Act to be the percentage of profits to which, on the profit distribution, the first company referred to in paragraph 2(1) above would be entitled as mentioned in that paragraph".
Thus if there is a class of shares carrying limited rights, such rights are deemed to be waived to the extent that they are so limited. If, as a result, the parent company's dividend, as a percentage of the whole, is less than it would have been without the waiver, the lesser percentage is taken for the purpose of section 28.
Paragraph 5 provides:
"(1) This paragraph applies if, at any time in the relevant accounting period, any of the equity holders—
(a) to whom the profit distribution is made…
holds, as such an equity holder, any shares…which carry rights in respect of dividend or interest…which are of such a nature (as, for example, if any shares will cease to carry a right to a dividend at a future time) that if the profit distribution…were to take place in a different accounting period the percentage to which, in accordance with the preceding provisions of this Part of this Schedule, that equity holder would be entitled of profits on the profit distribution…would be...
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